Credit Monitoring and Management
After making a credit decision, successful collection on the loan rests on accurate and comprehensive credit management and monitoring. Loan officers can enhance a credit management and monitoring strategy through improved customer relationships.
Community bankers value the close ties to their communities and are best positioned to develop personal relationships with their customers. Loan officers with genuine customer relationships will have greater insight into the financial position of the individual's business. Furthermore, loan officers will better understand the customer's financial trends and can identify early warning indicators and areas of potential weaknesses.
The following are key areas loan officers should focus on to develop a more robust credit management and monitoring strategy augmented by familiar customer relationships.
Document Financial Information
Annually, officers should obtain updated financial information and tax returns (including all K-1s for business interests). Loan files should routinely show that the information has been reviewed and/or analyzed. In order to determine that the borrower(s) has the on-going capacity to service the outstanding debt, the file should contain:
- An updated analysis showing available cash flow
- Outstanding debt obligations
- Computation for debt service coverage ratio (DSCR) and net debt ratios.
Many borrowers provide personal financial statements (PFS) showing liquid assets, which may have been partially used to approve the credit facility; however, the files often do not include verification of the liquidity (bank statements, brokerage statements, etc.). To further support the borrower’s financial capacity, banks should obtain verification of liquid assets via these statements annually.
Document Officer Comments
Lenders should place greater emphasis on problem relationships. Incorporating officer comments describing the status of loans that are classified or are dynamic in nature is vital to document the file on a routine basis (at least quarterly or more frequently, if necessary).
Bank management must reinforce this practice with the loan officers and understand the importance of maintaining updated memos for problem credits on a regular basis that should include action plans, benchmarks and trigger dates. Contained within this action plan there should also be a section for all collateral documents to be reviewed and verified to ensure the bank’s collateral position remains protected. This verification should include that all public records have been searched and validated to avoid any unknowns or surprises.
While implementing these practices may not reduce the overall risk of loss, it is a proactive approach to identify and measure potential weaknesses and manage loan portfolio problems with performance and time sensitive deadlines.